Question

If the reserve ratio is 20 percent, then $100 of new reserves can generate Question 18 options: $60 of new money in the economy. $250 of new money in the economy. $500 of new money in the economy. $2,000 of new money in the economy.

Answer 1

$500 of new money in the economy

Step-by-step explanation:

In order to find how much a new reserve can generate in an economy we need to find the money multiplier of the economy. If we know the reserve ratio of the banking system we can find the money multiplier.

The formula for money multiplier is 1/Reserve ratio

In the question the reserve ratio is 20% or 0.2 we will put this in the formula in order to find the money multiplier

Money multiplier = 1/0.2= 5

Now in order to find how much can a new reserve generate we will multiply the new reserve by the multiplier.

New reserve = $100

Money multiplier = 5

5*100= 500

So a $100 new reserve can generate $500 of new money in the economy.